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February 23, 2012

European Economy to Contract, Not Expand: EC

Spain, Italy will face tough times in new forecast

Altering its forecast on the state of the European economy in 2012, the European Commission said that the euro area would shrink instead of expanding, largely because of Spain and Italy. The two countries are expected to be in for some difficult times as they cope with various economic woes.

Bloomberg reported that the EC changed its November forecast of 0.5% growth for the euro area to one of a contraction of 0.3%, due mainly to new predictions of a 1% contraction in Spain and 1.3% in Italy. European Union Economic and Monetary Commissioner Olli Rehn was quoted saying, “The euro area has entered into a mild recession. Prospects have worsened and risks to the growth outlook do remain, but there are signs of stabilization.”

This will be the first time since 2009 that a full-year contraction Europe-wide has occurred. At the time the European economy suffered a 4.3% drop in the wake of the U.S. banking crisis, which revealed shortcomings in banking throughout Europe that launched the sovereign debt crisis.

Inflation was also predicted to rise higher than originally expected, with the November estimate of 1.7% giving way to a new expectation of 2.1%–higher than the European Central Bank’s target of 2%.

Major factors in the revised prediction included the high unemployment rate in Spain, currently 22.9%, coupled with a burst housing bubble, substantial corporate debt and burdensome austerity measures. Italy too faces rising unemployment, additional austerity and little available financing for business, all expected to weigh on domestic consumer demand as the year progresses.

Greece and Portugal were also factored in, with November’s expectation of a Greek contraction of 2.8% giving way to a new estimate of 4.4% and Portugal’s 3% estimate changing to 3.3%.

Ireland is expected to grow for the second year in a row, albeit only at 0.5%, and even economic stalwarts Germany and France came in for lower growth estimates than originally expected. Germany’s is down to 0.6% from 0.8%, and France is down to 0.4% from prior expectations of 0.6%. Both are expected to escape entering recession themselves.

Rehn also said that the downturn will be “rather mild and temporary, but the turnaround of the trend needs to be confirmed in coming months.”